FAC Explorer

Audit 309876

FY End
2023-09-30
Total Expended
$168.14M
Findings
684
Programs
21
Organization: Src, Inc. (NY)
Year: 2023 Accepted: 2024-06-25
Auditor: Bdo USA PC

Organization Exclusion Status:

Findings

ID Ref Severity Repeat Requirement
401958 2023-001 Significant Deficiency Yes AB
401959 2023-002 Significant Deficiency Yes AB
401960 2023-003 Significant Deficiency - AB
401961 2023-001 Significant Deficiency Yes AB
401962 2023-002 Significant Deficiency Yes AB
401963 2023-003 Significant Deficiency - AB
401964 2023-001 Significant Deficiency Yes AB
401965 2023-002 Significant Deficiency Yes AB
401966 2023-003 Significant Deficiency - AB
401967 2023-001 Significant Deficiency Yes AB
401968 2023-002 Significant Deficiency Yes AB
401969 2023-003 Significant Deficiency - AB
401970 2023-001 Significant Deficiency Yes AB
401971 2023-002 Significant Deficiency Yes AB
401972 2023-003 Significant Deficiency - AB
401973 2023-001 Significant Deficiency Yes AB
401974 2023-002 Significant Deficiency Yes AB
401975 2023-003 Significant Deficiency - AB
401976 2023-001 Significant Deficiency Yes AB
401977 2023-002 Significant Deficiency Yes AB
401978 2023-003 Significant Deficiency - AB
401979 2023-001 Significant Deficiency Yes AB
401980 2023-002 Significant Deficiency Yes AB
401981 2023-003 Significant Deficiency - AB
401982 2023-001 Significant Deficiency Yes AB
401983 2023-002 Significant Deficiency Yes AB
401984 2023-003 Significant Deficiency - AB
401985 2023-001 Significant Deficiency Yes AB
401986 2023-002 Significant Deficiency Yes AB
401987 2023-003 Significant Deficiency - AB
401988 2023-001 Significant Deficiency Yes AB
401989 2023-002 Significant Deficiency Yes AB
401990 2023-003 Significant Deficiency - AB
401991 2023-001 Significant Deficiency Yes AB
401992 2023-002 Significant Deficiency Yes AB
401993 2023-003 Significant Deficiency - AB
401994 2023-001 Significant Deficiency Yes AB
401995 2023-002 Significant Deficiency Yes AB
401996 2023-003 Significant Deficiency - AB
401997 2023-001 Significant Deficiency Yes AB
401998 2023-002 Significant Deficiency Yes AB
401999 2023-003 Significant Deficiency - AB
402000 2023-001 Significant Deficiency Yes AB
402001 2023-002 Significant Deficiency Yes AB
402002 2023-003 Significant Deficiency - AB
402003 2023-001 Significant Deficiency Yes AB
402004 2023-002 Significant Deficiency Yes AB
402005 2023-003 Significant Deficiency - AB
402006 2023-001 Significant Deficiency Yes AB
402007 2023-002 Significant Deficiency Yes AB
402008 2023-003 Significant Deficiency - AB
402009 2023-001 Significant Deficiency Yes AB
402010 2023-002 Significant Deficiency Yes AB
402011 2023-003 Significant Deficiency - AB
402012 2023-001 Significant Deficiency Yes AB
402013 2023-002 Significant Deficiency Yes AB
402014 2023-003 Significant Deficiency - AB
402015 2023-001 Significant Deficiency Yes AB
402016 2023-002 Significant Deficiency Yes AB
402017 2023-003 Significant Deficiency - AB
402018 2023-001 Significant Deficiency Yes AB
402019 2023-002 Significant Deficiency Yes AB
402020 2023-003 Significant Deficiency - AB
402021 2023-001 Significant Deficiency Yes AB
402022 2023-002 Significant Deficiency Yes AB
402023 2023-003 Significant Deficiency - AB
402024 2023-001 Significant Deficiency Yes AB
402025 2023-002 Significant Deficiency Yes AB
402026 2023-003 Significant Deficiency - AB
402027 2023-001 Significant Deficiency Yes AB
402028 2023-002 Significant Deficiency Yes AB
402029 2023-003 Significant Deficiency - AB
402030 2023-001 Significant Deficiency Yes AB
402031 2023-002 Significant Deficiency Yes AB
402032 2023-003 Significant Deficiency - AB
402033 2023-001 Significant Deficiency Yes AB
402034 2023-002 Significant Deficiency Yes AB
402035 2023-003 Significant Deficiency - AB
402036 2023-001 Significant Deficiency Yes AB
402037 2023-002 Significant Deficiency Yes AB
402038 2023-003 Significant Deficiency - AB
402039 2023-001 Significant Deficiency Yes AB
402040 2023-002 Significant Deficiency Yes AB
402041 2023-003 Significant Deficiency - AB
402042 2023-001 Significant Deficiency Yes AB
402043 2023-002 Significant Deficiency Yes AB
402044 2023-003 Significant Deficiency - AB
402045 2023-001 Significant Deficiency Yes AB
402046 2023-002 Significant Deficiency Yes AB
402047 2023-003 Significant Deficiency - AB
402048 2023-001 Significant Deficiency Yes AB
402049 2023-002 Significant Deficiency Yes AB
402050 2023-003 Significant Deficiency - AB
402051 2023-001 Significant Deficiency Yes AB
402052 2023-002 Significant Deficiency Yes AB
402053 2023-003 Significant Deficiency - AB
402054 2023-001 Significant Deficiency Yes AB
402055 2023-002 Significant Deficiency Yes AB
402056 2023-003 Significant Deficiency - AB
402057 2023-001 Significant Deficiency Yes AB
402058 2023-002 Significant Deficiency Yes AB
402059 2023-003 Significant Deficiency - AB
402060 2023-001 Significant Deficiency Yes AB
402061 2023-002 Significant Deficiency Yes AB
402062 2023-003 Significant Deficiency - AB
402063 2023-001 Significant Deficiency Yes AB
402064 2023-002 Significant Deficiency Yes AB
402065 2023-003 Significant Deficiency - AB
402066 2023-001 Significant Deficiency Yes AB
402067 2023-002 Significant Deficiency Yes AB
402068 2023-003 Significant Deficiency - AB
402069 2023-001 Significant Deficiency Yes AB
402070 2023-002 Significant Deficiency Yes AB
402071 2023-003 Significant Deficiency - AB
402072 2023-001 Significant Deficiency Yes AB
402073 2023-002 Significant Deficiency Yes AB
402074 2023-003 Significant Deficiency - AB
402075 2023-001 Significant Deficiency Yes AB
402076 2023-002 Significant Deficiency Yes AB
402077 2023-003 Significant Deficiency - AB
402078 2023-001 Significant Deficiency Yes AB
402079 2023-002 Significant Deficiency Yes AB
402080 2023-003 Significant Deficiency - AB
402081 2023-001 Significant Deficiency Yes AB
402082 2023-002 Significant Deficiency Yes AB
402083 2023-003 Significant Deficiency - AB
402084 2023-001 Significant Deficiency Yes AB
402085 2023-002 Significant Deficiency Yes AB
402086 2023-003 Significant Deficiency - AB
402087 2023-001 Significant Deficiency Yes AB
402088 2023-002 Significant Deficiency Yes AB
402089 2023-003 Significant Deficiency - AB
402090 2023-001 Significant Deficiency Yes AB
402091 2023-002 Significant Deficiency Yes AB
402092 2023-003 Significant Deficiency - AB
402093 2023-001 Significant Deficiency Yes AB
402094 2023-002 Significant Deficiency Yes AB
402095 2023-003 Significant Deficiency - AB
402096 2023-001 Significant Deficiency Yes AB
402097 2023-002 Significant Deficiency Yes AB
402098 2023-003 Significant Deficiency - AB
402099 2023-001 Significant Deficiency Yes AB
402100 2023-002 Significant Deficiency Yes AB
402101 2023-003 Significant Deficiency - AB
402102 2023-001 Significant Deficiency Yes AB
402103 2023-002 Significant Deficiency Yes AB
402104 2023-003 Significant Deficiency - AB
402105 2023-001 Significant Deficiency Yes AB
402106 2023-002 Significant Deficiency Yes AB
402107 2023-003 Significant Deficiency - AB
402108 2023-001 Significant Deficiency Yes AB
402109 2023-002 Significant Deficiency Yes AB
402110 2023-003 Significant Deficiency - AB
402111 2023-001 Significant Deficiency Yes AB
402112 2023-002 Significant Deficiency Yes AB
402113 2023-003 Significant Deficiency - AB
402114 2023-001 Significant Deficiency Yes AB
402115 2023-002 Significant Deficiency Yes AB
402116 2023-003 Significant Deficiency - AB
402117 2023-001 Significant Deficiency Yes AB
402118 2023-002 Significant Deficiency Yes AB
402119 2023-003 Significant Deficiency - AB
402120 2023-001 Significant Deficiency Yes AB
402121 2023-002 Significant Deficiency Yes AB
402122 2023-003 Significant Deficiency - AB
402123 2023-001 Significant Deficiency Yes AB
402124 2023-002 Significant Deficiency Yes AB
402125 2023-003 Significant Deficiency - AB
402126 2023-001 Significant Deficiency Yes AB
402127 2023-002 Significant Deficiency Yes AB
402128 2023-003 Significant Deficiency - AB
402129 2023-001 Significant Deficiency Yes AB
402130 2023-002 Significant Deficiency Yes AB
402131 2023-003 Significant Deficiency - AB
402132 2023-001 Significant Deficiency Yes AB
402133 2023-002 Significant Deficiency Yes AB
402134 2023-003 Significant Deficiency - AB
402135 2023-001 Significant Deficiency Yes AB
402136 2023-002 Significant Deficiency Yes AB
402137 2023-003 Significant Deficiency - AB
402138 2023-001 Significant Deficiency Yes AB
402139 2023-002 Significant Deficiency Yes AB
402140 2023-003 Significant Deficiency - AB
402141 2023-001 Significant Deficiency Yes AB
402142 2023-002 Significant Deficiency Yes AB
402143 2023-003 Significant Deficiency - AB
402144 2023-001 Significant Deficiency Yes AB
402145 2023-002 Significant Deficiency Yes AB
402146 2023-003 Significant Deficiency - AB
402147 2023-001 Significant Deficiency Yes AB
402148 2023-002 Significant Deficiency Yes AB
402149 2023-003 Significant Deficiency - AB
402150 2023-001 Significant Deficiency Yes AB
402151 2023-002 Significant Deficiency Yes AB
402152 2023-003 Significant Deficiency - AB
402153 2023-001 Significant Deficiency Yes AB
402154 2023-002 Significant Deficiency Yes AB
402155 2023-003 Significant Deficiency - AB
402156 2023-001 Significant Deficiency Yes AB
402157 2023-002 Significant Deficiency Yes AB
402158 2023-003 Significant Deficiency - AB
402159 2023-001 Significant Deficiency Yes AB
402160 2023-002 Significant Deficiency Yes AB
402161 2023-003 Significant Deficiency - AB
402162 2023-001 Significant Deficiency Yes AB
402163 2023-002 Significant Deficiency Yes AB
402164 2023-003 Significant Deficiency - AB
402165 2023-001 Significant Deficiency Yes AB
402166 2023-002 Significant Deficiency Yes AB
402167 2023-003 Significant Deficiency - AB
402168 2023-001 Significant Deficiency Yes AB
402169 2023-002 Significant Deficiency Yes AB
402170 2023-003 Significant Deficiency - AB
402171 2023-001 Significant Deficiency Yes AB
402172 2023-002 Significant Deficiency Yes AB
402173 2023-003 Significant Deficiency - AB
402174 2023-001 Significant Deficiency Yes AB
402175 2023-002 Significant Deficiency Yes AB
402176 2023-003 Significant Deficiency - AB
402177 2023-001 Significant Deficiency Yes AB
402178 2023-002 Significant Deficiency Yes AB
402179 2023-003 Significant Deficiency - AB
402180 2023-001 Significant Deficiency Yes AB
402181 2023-002 Significant Deficiency Yes AB
402182 2023-003 Significant Deficiency - AB
402183 2023-001 Significant Deficiency Yes AB
402184 2023-002 Significant Deficiency Yes AB
402185 2023-003 Significant Deficiency - AB
402186 2023-001 Significant Deficiency Yes AB
402187 2023-002 Significant Deficiency Yes AB
402188 2023-003 Significant Deficiency - AB
402189 2023-001 Significant Deficiency Yes AB
402190 2023-002 Significant Deficiency Yes AB
402191 2023-003 Significant Deficiency - AB
402192 2023-001 Significant Deficiency Yes AB
402193 2023-002 Significant Deficiency Yes AB
402194 2023-003 Significant Deficiency - AB
402195 2023-001 Significant Deficiency Yes AB
402196 2023-002 Significant Deficiency Yes AB
402197 2023-003 Significant Deficiency - AB
402198 2023-001 Significant Deficiency Yes AB
402199 2023-002 Significant Deficiency Yes AB
402200 2023-003 Significant Deficiency - AB
402201 2023-001 Significant Deficiency Yes AB
402202 2023-002 Significant Deficiency Yes AB
402203 2023-003 Significant Deficiency - AB
402204 2023-001 Significant Deficiency Yes AB
402205 2023-002 Significant Deficiency Yes AB
402206 2023-003 Significant Deficiency - AB
402207 2023-001 Significant Deficiency Yes AB
402208 2023-002 Significant Deficiency Yes AB
402209 2023-003 Significant Deficiency - AB
402210 2023-001 Significant Deficiency Yes AB
402211 2023-002 Significant Deficiency Yes AB
402212 2023-003 Significant Deficiency - AB
402213 2023-001 Significant Deficiency Yes AB
402214 2023-002 Significant Deficiency Yes AB
402215 2023-003 Significant Deficiency - AB
402216 2023-001 Significant Deficiency Yes AB
402217 2023-002 Significant Deficiency Yes AB
402218 2023-003 Significant Deficiency - AB
402219 2023-001 Significant Deficiency Yes AB
402220 2023-002 Significant Deficiency Yes AB
402221 2023-003 Significant Deficiency - AB
402222 2023-001 Significant Deficiency Yes AB
402223 2023-002 Significant Deficiency Yes AB
402224 2023-003 Significant Deficiency - AB
402225 2023-001 Significant Deficiency Yes AB
402226 2023-002 Significant Deficiency Yes AB
402227 2023-003 Significant Deficiency - AB
402228 2023-001 Significant Deficiency Yes AB
402229 2023-002 Significant Deficiency Yes AB
402230 2023-003 Significant Deficiency - AB
402231 2023-001 Significant Deficiency Yes AB
402232 2023-002 Significant Deficiency Yes AB
402233 2023-003 Significant Deficiency - AB
402234 2023-001 Significant Deficiency Yes AB
402235 2023-002 Significant Deficiency Yes AB
402236 2023-003 Significant Deficiency - AB
402237 2023-001 Significant Deficiency Yes AB
402238 2023-002 Significant Deficiency Yes AB
402239 2023-003 Significant Deficiency - AB
402240 2023-001 Significant Deficiency Yes AB
402241 2023-002 Significant Deficiency Yes AB
402242 2023-003 Significant Deficiency - AB
402243 2023-001 Significant Deficiency Yes AB
402244 2023-002 Significant Deficiency Yes AB
402245 2023-003 Significant Deficiency - AB
402246 2023-001 Significant Deficiency Yes AB
402247 2023-002 Significant Deficiency Yes AB
402248 2023-003 Significant Deficiency - AB
402249 2023-001 Significant Deficiency Yes AB
402250 2023-002 Significant Deficiency Yes AB
402251 2023-003 Significant Deficiency - AB
402252 2023-001 Significant Deficiency Yes AB
402253 2023-002 Significant Deficiency Yes AB
402254 2023-003 Significant Deficiency - AB
402255 2023-001 Significant Deficiency Yes AB
402256 2023-002 Significant Deficiency Yes AB
402257 2023-003 Significant Deficiency - AB
402258 2023-001 Significant Deficiency Yes AB
402259 2023-002 Significant Deficiency Yes AB
402260 2023-003 Significant Deficiency - AB
402261 2023-001 Significant Deficiency Yes AB
402262 2023-002 Significant Deficiency Yes AB
402263 2023-003 Significant Deficiency - AB
402264 2023-001 Significant Deficiency Yes AB
402265 2023-002 Significant Deficiency Yes AB
402266 2023-003 Significant Deficiency - AB
402267 2023-001 Significant Deficiency Yes AB
402268 2023-002 Significant Deficiency Yes AB
402269 2023-003 Significant Deficiency - AB
402270 2023-001 Significant Deficiency Yes AB
402271 2023-002 Significant Deficiency Yes AB
402272 2023-003 Significant Deficiency - AB
402273 2023-001 Significant Deficiency Yes AB
402274 2023-002 Significant Deficiency Yes AB
402275 2023-003 Significant Deficiency - AB
402276 2023-001 Significant Deficiency Yes AB
402277 2023-002 Significant Deficiency Yes AB
402278 2023-003 Significant Deficiency - AB
402279 2023-001 Significant Deficiency Yes AB
402280 2023-002 Significant Deficiency Yes AB
402281 2023-003 Significant Deficiency - AB
402282 2023-001 Significant Deficiency Yes AB
402283 2023-002 Significant Deficiency Yes AB
402284 2023-003 Significant Deficiency - AB
402285 2023-001 Significant Deficiency Yes AB
402286 2023-002 Significant Deficiency Yes AB
402287 2023-003 Significant Deficiency - AB
402288 2023-001 Significant Deficiency Yes AB
402289 2023-002 Significant Deficiency Yes AB
402290 2023-003 Significant Deficiency - AB
402291 2023-001 Significant Deficiency Yes AB
402292 2023-002 Significant Deficiency Yes AB
402293 2023-003 Significant Deficiency - AB
402294 2023-001 Significant Deficiency Yes AB
402295 2023-002 Significant Deficiency Yes AB
402296 2023-003 Significant Deficiency - AB
402297 2023-001 Significant Deficiency Yes AB
402298 2023-002 Significant Deficiency Yes AB
402299 2023-003 Significant Deficiency - AB
978400 2023-001 Significant Deficiency Yes AB
978401 2023-002 Significant Deficiency Yes AB
978402 2023-003 Significant Deficiency - AB
978403 2023-001 Significant Deficiency Yes AB
978404 2023-002 Significant Deficiency Yes AB
978405 2023-003 Significant Deficiency - AB
978406 2023-001 Significant Deficiency Yes AB
978407 2023-002 Significant Deficiency Yes AB
978408 2023-003 Significant Deficiency - AB
978409 2023-001 Significant Deficiency Yes AB
978410 2023-002 Significant Deficiency Yes AB
978411 2023-003 Significant Deficiency - AB
978412 2023-001 Significant Deficiency Yes AB
978413 2023-002 Significant Deficiency Yes AB
978414 2023-003 Significant Deficiency - AB
978415 2023-001 Significant Deficiency Yes AB
978416 2023-002 Significant Deficiency Yes AB
978417 2023-003 Significant Deficiency - AB
978418 2023-001 Significant Deficiency Yes AB
978419 2023-002 Significant Deficiency Yes AB
978420 2023-003 Significant Deficiency - AB
978421 2023-001 Significant Deficiency Yes AB
978422 2023-002 Significant Deficiency Yes AB
978423 2023-003 Significant Deficiency - AB
978424 2023-001 Significant Deficiency Yes AB
978425 2023-002 Significant Deficiency Yes AB
978426 2023-003 Significant Deficiency - AB
978427 2023-001 Significant Deficiency Yes AB
978428 2023-002 Significant Deficiency Yes AB
978429 2023-003 Significant Deficiency - AB
978430 2023-001 Significant Deficiency Yes AB
978431 2023-002 Significant Deficiency Yes AB
978432 2023-003 Significant Deficiency - AB
978433 2023-001 Significant Deficiency Yes AB
978434 2023-002 Significant Deficiency Yes AB
978435 2023-003 Significant Deficiency - AB
978436 2023-001 Significant Deficiency Yes AB
978437 2023-002 Significant Deficiency Yes AB
978438 2023-003 Significant Deficiency - AB
978439 2023-001 Significant Deficiency Yes AB
978440 2023-002 Significant Deficiency Yes AB
978441 2023-003 Significant Deficiency - AB
978442 2023-001 Significant Deficiency Yes AB
978443 2023-002 Significant Deficiency Yes AB
978444 2023-003 Significant Deficiency - AB
978445 2023-001 Significant Deficiency Yes AB
978446 2023-002 Significant Deficiency Yes AB
978447 2023-003 Significant Deficiency - AB
978448 2023-001 Significant Deficiency Yes AB
978449 2023-002 Significant Deficiency Yes AB
978450 2023-003 Significant Deficiency - AB
978451 2023-001 Significant Deficiency Yes AB
978452 2023-002 Significant Deficiency Yes AB
978453 2023-003 Significant Deficiency - AB
978454 2023-001 Significant Deficiency Yes AB
978455 2023-002 Significant Deficiency Yes AB
978456 2023-003 Significant Deficiency - AB
978457 2023-001 Significant Deficiency Yes AB
978458 2023-002 Significant Deficiency Yes AB
978459 2023-003 Significant Deficiency - AB
978460 2023-001 Significant Deficiency Yes AB
978461 2023-002 Significant Deficiency Yes AB
978462 2023-003 Significant Deficiency - AB
978463 2023-001 Significant Deficiency Yes AB
978464 2023-002 Significant Deficiency Yes AB
978465 2023-003 Significant Deficiency - AB
978466 2023-001 Significant Deficiency Yes AB
978467 2023-002 Significant Deficiency Yes AB
978468 2023-003 Significant Deficiency - AB
978469 2023-001 Significant Deficiency Yes AB
978470 2023-002 Significant Deficiency Yes AB
978471 2023-003 Significant Deficiency - AB
978472 2023-001 Significant Deficiency Yes AB
978473 2023-002 Significant Deficiency Yes AB
978474 2023-003 Significant Deficiency - AB
978475 2023-001 Significant Deficiency Yes AB
978476 2023-002 Significant Deficiency Yes AB
978477 2023-003 Significant Deficiency - AB
978478 2023-001 Significant Deficiency Yes AB
978479 2023-002 Significant Deficiency Yes AB
978480 2023-003 Significant Deficiency - AB
978481 2023-001 Significant Deficiency Yes AB
978482 2023-002 Significant Deficiency Yes AB
978483 2023-003 Significant Deficiency - AB
978484 2023-001 Significant Deficiency Yes AB
978485 2023-002 Significant Deficiency Yes AB
978486 2023-003 Significant Deficiency - AB
978487 2023-001 Significant Deficiency Yes AB
978488 2023-002 Significant Deficiency Yes AB
978489 2023-003 Significant Deficiency - AB
978490 2023-001 Significant Deficiency Yes AB
978491 2023-002 Significant Deficiency Yes AB
978492 2023-003 Significant Deficiency - AB
978493 2023-001 Significant Deficiency Yes AB
978494 2023-002 Significant Deficiency Yes AB
978495 2023-003 Significant Deficiency - AB
978496 2023-001 Significant Deficiency Yes AB
978497 2023-002 Significant Deficiency Yes AB
978498 2023-003 Significant Deficiency - AB
978499 2023-001 Significant Deficiency Yes AB
978500 2023-002 Significant Deficiency Yes AB
978501 2023-003 Significant Deficiency - AB
978502 2023-001 Significant Deficiency Yes AB
978503 2023-002 Significant Deficiency Yes AB
978504 2023-003 Significant Deficiency - AB
978505 2023-001 Significant Deficiency Yes AB
978506 2023-002 Significant Deficiency Yes AB
978507 2023-003 Significant Deficiency - AB
978508 2023-001 Significant Deficiency Yes AB
978509 2023-002 Significant Deficiency Yes AB
978510 2023-003 Significant Deficiency - AB
978511 2023-001 Significant Deficiency Yes AB
978512 2023-002 Significant Deficiency Yes AB
978513 2023-003 Significant Deficiency - AB
978514 2023-001 Significant Deficiency Yes AB
978515 2023-002 Significant Deficiency Yes AB
978516 2023-003 Significant Deficiency - AB
978517 2023-001 Significant Deficiency Yes AB
978518 2023-002 Significant Deficiency Yes AB
978519 2023-003 Significant Deficiency - AB
978520 2023-001 Significant Deficiency Yes AB
978521 2023-002 Significant Deficiency Yes AB
978522 2023-003 Significant Deficiency - AB
978523 2023-001 Significant Deficiency Yes AB
978524 2023-002 Significant Deficiency Yes AB
978525 2023-003 Significant Deficiency - AB
978526 2023-001 Significant Deficiency Yes AB
978527 2023-002 Significant Deficiency Yes AB
978528 2023-003 Significant Deficiency - AB
978529 2023-001 Significant Deficiency Yes AB
978530 2023-002 Significant Deficiency Yes AB
978531 2023-003 Significant Deficiency - AB
978532 2023-001 Significant Deficiency Yes AB
978533 2023-002 Significant Deficiency Yes AB
978534 2023-003 Significant Deficiency - AB
978535 2023-001 Significant Deficiency Yes AB
978536 2023-002 Significant Deficiency Yes AB
978537 2023-003 Significant Deficiency - AB
978538 2023-001 Significant Deficiency Yes AB
978539 2023-002 Significant Deficiency Yes AB
978540 2023-003 Significant Deficiency - AB
978541 2023-001 Significant Deficiency Yes AB
978542 2023-002 Significant Deficiency Yes AB
978543 2023-003 Significant Deficiency - AB
978544 2023-001 Significant Deficiency Yes AB
978545 2023-002 Significant Deficiency Yes AB
978546 2023-003 Significant Deficiency - AB
978547 2023-001 Significant Deficiency Yes AB
978548 2023-002 Significant Deficiency Yes AB
978549 2023-003 Significant Deficiency - AB
978550 2023-001 Significant Deficiency Yes AB
978551 2023-002 Significant Deficiency Yes AB
978552 2023-003 Significant Deficiency - AB
978553 2023-001 Significant Deficiency Yes AB
978554 2023-002 Significant Deficiency Yes AB
978555 2023-003 Significant Deficiency - AB
978556 2023-001 Significant Deficiency Yes AB
978557 2023-002 Significant Deficiency Yes AB
978558 2023-003 Significant Deficiency - AB
978559 2023-001 Significant Deficiency Yes AB
978560 2023-002 Significant Deficiency Yes AB
978561 2023-003 Significant Deficiency - AB
978562 2023-001 Significant Deficiency Yes AB
978563 2023-002 Significant Deficiency Yes AB
978564 2023-003 Significant Deficiency - AB
978565 2023-001 Significant Deficiency Yes AB
978566 2023-002 Significant Deficiency Yes AB
978567 2023-003 Significant Deficiency - AB
978568 2023-001 Significant Deficiency Yes AB
978569 2023-002 Significant Deficiency Yes AB
978570 2023-003 Significant Deficiency - AB
978571 2023-001 Significant Deficiency Yes AB
978572 2023-002 Significant Deficiency Yes AB
978573 2023-003 Significant Deficiency - AB
978574 2023-001 Significant Deficiency Yes AB
978575 2023-002 Significant Deficiency Yes AB
978576 2023-003 Significant Deficiency - AB
978577 2023-001 Significant Deficiency Yes AB
978578 2023-002 Significant Deficiency Yes AB
978579 2023-003 Significant Deficiency - AB
978580 2023-001 Significant Deficiency Yes AB
978581 2023-002 Significant Deficiency Yes AB
978582 2023-003 Significant Deficiency - AB
978583 2023-001 Significant Deficiency Yes AB
978584 2023-002 Significant Deficiency Yes AB
978585 2023-003 Significant Deficiency - AB
978586 2023-001 Significant Deficiency Yes AB
978587 2023-002 Significant Deficiency Yes AB
978588 2023-003 Significant Deficiency - AB
978589 2023-001 Significant Deficiency Yes AB
978590 2023-002 Significant Deficiency Yes AB
978591 2023-003 Significant Deficiency - AB
978592 2023-001 Significant Deficiency Yes AB
978593 2023-002 Significant Deficiency Yes AB
978594 2023-003 Significant Deficiency - AB
978595 2023-001 Significant Deficiency Yes AB
978596 2023-002 Significant Deficiency Yes AB
978597 2023-003 Significant Deficiency - AB
978598 2023-001 Significant Deficiency Yes AB
978599 2023-002 Significant Deficiency Yes AB
978600 2023-003 Significant Deficiency - AB
978601 2023-001 Significant Deficiency Yes AB
978602 2023-002 Significant Deficiency Yes AB
978603 2023-003 Significant Deficiency - AB
978604 2023-001 Significant Deficiency Yes AB
978605 2023-002 Significant Deficiency Yes AB
978606 2023-003 Significant Deficiency - AB
978607 2023-001 Significant Deficiency Yes AB
978608 2023-002 Significant Deficiency Yes AB
978609 2023-003 Significant Deficiency - AB
978610 2023-001 Significant Deficiency Yes AB
978611 2023-002 Significant Deficiency Yes AB
978612 2023-003 Significant Deficiency - AB
978613 2023-001 Significant Deficiency Yes AB
978614 2023-002 Significant Deficiency Yes AB
978615 2023-003 Significant Deficiency - AB
978616 2023-001 Significant Deficiency Yes AB
978617 2023-002 Significant Deficiency Yes AB
978618 2023-003 Significant Deficiency - AB
978619 2023-001 Significant Deficiency Yes AB
978620 2023-002 Significant Deficiency Yes AB
978621 2023-003 Significant Deficiency - AB
978622 2023-001 Significant Deficiency Yes AB
978623 2023-002 Significant Deficiency Yes AB
978624 2023-003 Significant Deficiency - AB
978625 2023-001 Significant Deficiency Yes AB
978626 2023-002 Significant Deficiency Yes AB
978627 2023-003 Significant Deficiency - AB
978628 2023-001 Significant Deficiency Yes AB
978629 2023-002 Significant Deficiency Yes AB
978630 2023-003 Significant Deficiency - AB
978631 2023-001 Significant Deficiency Yes AB
978632 2023-002 Significant Deficiency Yes AB
978633 2023-003 Significant Deficiency - AB
978634 2023-001 Significant Deficiency Yes AB
978635 2023-002 Significant Deficiency Yes AB
978636 2023-003 Significant Deficiency - AB
978637 2023-001 Significant Deficiency Yes AB
978638 2023-002 Significant Deficiency Yes AB
978639 2023-003 Significant Deficiency - AB
978640 2023-001 Significant Deficiency Yes AB
978641 2023-002 Significant Deficiency Yes AB
978642 2023-003 Significant Deficiency - AB
978643 2023-001 Significant Deficiency Yes AB
978644 2023-002 Significant Deficiency Yes AB
978645 2023-003 Significant Deficiency - AB
978646 2023-001 Significant Deficiency Yes AB
978647 2023-002 Significant Deficiency Yes AB
978648 2023-003 Significant Deficiency - AB
978649 2023-001 Significant Deficiency Yes AB
978650 2023-002 Significant Deficiency Yes AB
978651 2023-003 Significant Deficiency - AB
978652 2023-001 Significant Deficiency Yes AB
978653 2023-002 Significant Deficiency Yes AB
978654 2023-003 Significant Deficiency - AB
978655 2023-001 Significant Deficiency Yes AB
978656 2023-002 Significant Deficiency Yes AB
978657 2023-003 Significant Deficiency - AB
978658 2023-001 Significant Deficiency Yes AB
978659 2023-002 Significant Deficiency Yes AB
978660 2023-003 Significant Deficiency - AB
978661 2023-001 Significant Deficiency Yes AB
978662 2023-002 Significant Deficiency Yes AB
978663 2023-003 Significant Deficiency - AB
978664 2023-001 Significant Deficiency Yes AB
978665 2023-002 Significant Deficiency Yes AB
978666 2023-003 Significant Deficiency - AB
978667 2023-001 Significant Deficiency Yes AB
978668 2023-002 Significant Deficiency Yes AB
978669 2023-003 Significant Deficiency - AB
978670 2023-001 Significant Deficiency Yes AB
978671 2023-002 Significant Deficiency Yes AB
978672 2023-003 Significant Deficiency - AB
978673 2023-001 Significant Deficiency Yes AB
978674 2023-002 Significant Deficiency Yes AB
978675 2023-003 Significant Deficiency - AB
978676 2023-001 Significant Deficiency Yes AB
978677 2023-002 Significant Deficiency Yes AB
978678 2023-003 Significant Deficiency - AB
978679 2023-001 Significant Deficiency Yes AB
978680 2023-002 Significant Deficiency Yes AB
978681 2023-003 Significant Deficiency - AB
978682 2023-001 Significant Deficiency Yes AB
978683 2023-002 Significant Deficiency Yes AB
978684 2023-003 Significant Deficiency - AB
978685 2023-001 Significant Deficiency Yes AB
978686 2023-002 Significant Deficiency Yes AB
978687 2023-003 Significant Deficiency - AB
978688 2023-001 Significant Deficiency Yes AB
978689 2023-002 Significant Deficiency Yes AB
978690 2023-003 Significant Deficiency - AB
978691 2023-001 Significant Deficiency Yes AB
978692 2023-002 Significant Deficiency Yes AB
978693 2023-003 Significant Deficiency - AB
978694 2023-001 Significant Deficiency Yes AB
978695 2023-002 Significant Deficiency Yes AB
978696 2023-003 Significant Deficiency - AB
978697 2023-001 Significant Deficiency Yes AB
978698 2023-002 Significant Deficiency Yes AB
978699 2023-003 Significant Deficiency - AB
978700 2023-001 Significant Deficiency Yes AB
978701 2023-002 Significant Deficiency Yes AB
978702 2023-003 Significant Deficiency - AB
978703 2023-001 Significant Deficiency Yes AB
978704 2023-002 Significant Deficiency Yes AB
978705 2023-003 Significant Deficiency - AB
978706 2023-001 Significant Deficiency Yes AB
978707 2023-002 Significant Deficiency Yes AB
978708 2023-003 Significant Deficiency - AB
978709 2023-001 Significant Deficiency Yes AB
978710 2023-002 Significant Deficiency Yes AB
978711 2023-003 Significant Deficiency - AB
978712 2023-001 Significant Deficiency Yes AB
978713 2023-002 Significant Deficiency Yes AB
978714 2023-003 Significant Deficiency - AB
978715 2023-001 Significant Deficiency Yes AB
978716 2023-002 Significant Deficiency Yes AB
978717 2023-003 Significant Deficiency - AB
978718 2023-001 Significant Deficiency Yes AB
978719 2023-002 Significant Deficiency Yes AB
978720 2023-003 Significant Deficiency - AB
978721 2023-001 Significant Deficiency Yes AB
978722 2023-002 Significant Deficiency Yes AB
978723 2023-003 Significant Deficiency - AB
978724 2023-001 Significant Deficiency Yes AB
978725 2023-002 Significant Deficiency Yes AB
978726 2023-003 Significant Deficiency - AB
978727 2023-001 Significant Deficiency Yes AB
978728 2023-002 Significant Deficiency Yes AB
978729 2023-003 Significant Deficiency - AB
978730 2023-001 Significant Deficiency Yes AB
978731 2023-002 Significant Deficiency Yes AB
978732 2023-003 Significant Deficiency - AB
978733 2023-001 Significant Deficiency Yes AB
978734 2023-002 Significant Deficiency Yes AB
978735 2023-003 Significant Deficiency - AB
978736 2023-001 Significant Deficiency Yes AB
978737 2023-002 Significant Deficiency Yes AB
978738 2023-003 Significant Deficiency - AB
978739 2023-001 Significant Deficiency Yes AB
978740 2023-002 Significant Deficiency Yes AB
978741 2023-003 Significant Deficiency - AB

Programs

ALN Program Spent Major Findings
93.RD Department of Health and Human Services - Center for Disease Control $1.86M Yes 3
12.RD Department of Defense - Defense Technical Information Center $732,048 Yes 3
12.RD Department of Defense - Washington Headquarters Services $565,376 Yes 3
81.RD Department of Energy $464,967 Yes 3
12.RD Department of Defense - National Reconnaissance Organization $449,859 Yes 3
12.RD Department of Defense - Other Contracts $416,836 Yes 3
12.RD Department of Defense - Office of the Secretary of Defense $407,256 Yes 3
12.RD Department of Defense - Defense Intelligence Agency $398,308 Yes 3
12.RD Department of Defense - Defense Advanced Research Projects Agency $280,448 Yes 3
66.RD Environmental Protection Agency $46,319 Yes 3
12.RD Department of Defense - Marines $40,485 Yes 3
12.RD Department of Defense - Defense Threat Reduction Agency $37,071 Yes 3
97.RD Department of Homeland Security $34,745 Yes 3
20.RD Department of Transportation $27,214 Yes 3
12.RD Department of Defense - United States Special Operations Command $24,569 Yes 3
19.RD Department of State $17,240 Yes 3
43.RD National Aeronautics and Space Administration $12,333 Yes 3
12.RD Department of Defense - Defense Logistics Agency $4,854 Yes 3
12.RD Department of Defense - Navy $1,697 Yes 3
12.RD Department of Defense - Army $528 Yes 3
12.RD Department of Defense - Air Force $307 Yes 3

Contacts

Name Title Type
DC9UXK381JR5 Danielle Chabot Auditee
3154528484 Leslie Pine Auditor
No contacts on file

Notes to SEFA

Title: Basis of Presentation Accounting Policies: Expenditures reported on the Schedule of Expenditures of Federal Awards (the Schedule) are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in Title 2 U.S. CFR Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance), wherein certain types of expenditures are not allowable or are limited as to reimbursement. Any negative amounts shown in the Schedule represent adjustments or credits made in the normal course of business to amounts reported as expenditures in prior years. De Minimis Rate Used: N Rate Explanation: Direct and indirect costs are charged to awards in accordance with cost principles contained in the Federal Acquisition Regulations (FAR) Part 31 and the Cost Accounting Standards. The Company recovers indirect costs under contracts and grants at provisional rates negotiated between itself and the cognizant agency (U.S. Department of Defense). Separate indirect cost rates are negotiated for fringe benefits, management overhead, facilities overhead, bid and proposal/independent research and development costs, general and administrative costs, material handling, subcontracting, laboratory, and facilities capital cost of money (FCCOM). Final indirect costs for each fiscal year are determined by the Defense Contract Audit Agency (DCAA) upon subsequent annual audits at which point cost reimbursement contracts are settled at actual rates. A detailed schedule of indirect cost rates is included in the DCAA annual incurred cost report for the year ended September 30, 2023. The Company has elected not to use the 10 percent de minimis indirect cost rate allowed under the Uniform Guidance. The accompanying Schedule includes the federal award activity of SRC, Inc. and Subsidiaries (SRC or the Company) under programs of the federal government for the year ended September 30, 2023. The information in this Schedule is presented in accordance with the requirements of the Uniform Guidance. Because the Schedule presents only a selected portion of the operations of the Company, it is not intended to and does not present the financial position, changes in net assets or cash flows of the Company. All of the Company’s federal awards were in the form of cash assistance for the year ended September 30, 2023. The Company had no federally funded insurance programs or loan guarantees during the year ended September 30, 2023.
Title: Other Contracts Accounting Policies: Expenditures reported on the Schedule of Expenditures of Federal Awards (the Schedule) are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in Title 2 U.S. CFR Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance), wherein certain types of expenditures are not allowable or are limited as to reimbursement. Any negative amounts shown in the Schedule represent adjustments or credits made in the normal course of business to amounts reported as expenditures in prior years. De Minimis Rate Used: N Rate Explanation: Direct and indirect costs are charged to awards in accordance with cost principles contained in the Federal Acquisition Regulations (FAR) Part 31 and the Cost Accounting Standards. The Company recovers indirect costs under contracts and grants at provisional rates negotiated between itself and the cognizant agency (U.S. Department of Defense). Separate indirect cost rates are negotiated for fringe benefits, management overhead, facilities overhead, bid and proposal/independent research and development costs, general and administrative costs, material handling, subcontracting, laboratory, and facilities capital cost of money (FCCOM). Final indirect costs for each fiscal year are determined by the Defense Contract Audit Agency (DCAA) upon subsequent annual audits at which point cost reimbursement contracts are settled at actual rates. A detailed schedule of indirect cost rates is included in the DCAA annual incurred cost report for the year ended September 30, 2023. The Company has elected not to use the 10 percent de minimis indirect cost rate allowed under the Uniform Guidance. Other contracts, referred to in the Schedule, primarily consist of federal contracts the Company has entered into that are of a sensitive nature which were subject to audit by a branch of the DCAA that monitors classified contracts.

Finding Details

Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.
Finding 2023-001
2023-001 Internal Control and Compliance Finding Related to 48 CFR 9904.404, Capitalization of Tangible Assets, and 48 CFR 9904.409, Depreciation of Tangible Capital Assets a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance related to the capitalization and depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses in excess of what should be allocated to FY 2023. Our review of SRC's depreciable cost identified the following noncompliance with specific requirements of 48 CFR 9904.404. In addition, our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. • The building purchase price includes the cost of the land and SRC depreciated land, which is in noncompliance with 48 CFR9904.404-40(a) and the contractor's written capital asset policy. The policy was not consistently applied by the employee recording the cost of buildings in the books and records. Land costs were depreciated resulting in overstated depreciation expense. • SRC’s DS regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliant with 48 CFR 9904.404-40(a). DS does not explain the application of the overhead and G&A rates for similar and non-similar products. Incorrectly calculated depreciable costs could result in additional depreciation expense charged to indirect pools, resulting in increased indirect costs charged to Government contracts. • Assets are not all tagged by SRC, which is in noncompliance with the contractor’s written capital asset policy. The policy is not consistently followed as assets did not have tags and some assets had virtual tags, not covered in the policy. The lack of asset tab results in issues with identifying assets. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.404-40(a) which states: The acquisition cost of tangible capital assets shall be capitalized. Capitalization shall be based upon a written policy that is reasonable and consistently applied. We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. We examined Item 4.5.0(d), Application of Overhead and G&A rates to specified Transactions or Costs-Self-constructed depreciable assets, of SRC's DS, Revision 22 and Revision 23, effective October 1, 2021 and October 1, 2022, respectively, which states in part: (d) Self-constructed depreciable assets. Costs for self-constructed assets consist of labor, non-labor and applicable indirect loadings accumulated in the shop supply and labor expense accounts by a unique project number. At the end of each month these costs are transferred to the balance sheet as a capital asset. At the completion of the project, the asset is placed in service so that depreciation of that asset can begin. There were no changes between the two DS revisions, the language used by SRC is identical. c. Recommendation SRC should comply with 48 CFR 9904.404 and its written policies regarding depreciable costs and self-constructed assets. In addition, SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. The written capital asset policy should be followed regarding asset tags and revised for virtual tags. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.404, 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001.
Finding 2023-002
2023-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders and Invoices a. Condition Our review of compliance and internal controls testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified an internal control deficiency relating to the review and approval of internal purchase orders and non-subcontract invoices. IOT costs are recorded to account number 5-4-080 – IOT from related LLCs . We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected two transactions totaling $3,486,240 or 52 percent of the FY 2023 adjusted IOT auditable universe. During our examination of the selected IOT costs, we examined invoices and invoice approval eForms to ensure the auditee complied with internal controls related to invoice approval and to ensure subcontract monitoring procedures were performed. The selected IOT transactions were incurred under two internal purchase orders (IPOs), of which a related entity is the performing company. One invoice approval eForm is applicable to each IPO. For both of the invoice approval eForms, no indication of review or approval by the SRC program manager was identified; instead, the eForms were approved by the program manager of the performing company. Additionally, during our examination of the selected IOT costs, we evaluated the IPO award eForms for the two selected IPOs to ensure the auditee complied with internal controls related to IPO approval. We identified for one of the IPOs, the IPO award eForm for the base and all change orders was approved by the related entity's program manager instead of an SRC program manager. The SRC program manager is required to be involved in the monitoring, review, and approval of IOT costs claimed at the prime contract level. Having the related entity program manager reviewing and approving their own invoices, is a clear lack of segregation of duties. The delegation letter issued in FY 2023 which permitted the related entity’s program managers to sign invoices on their own entity’s purchase orders did not serve as adequate corrective action. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB Compliance Supplement for the requirements of Part A. Activities Allowed and Unallowed and Part B. Allowable Costs/Cost Principles, requires us to plan and perform tests of internal control including control activities, which requires policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entity’s information system. We performed testing to determine if: "There is adequate segregation of duties established between entering/authorizing information, reviewing/approving the information, and for maintaining records supporting the information." "Reports and communications include relevant, accurate, and complete information that is provided to appropriate individuals on a timely basis." "Ongoing or recurring practices are demonstrated that monitor activities or results, and should be evidenced by adequate documentation of the monitoring activity, the results of the monitoring, and timely communication of any actions required due to observed deficiencies or deviations." "Procedures are in place to ensure that monitoring is routinely performed." "Appropriate levels of management review supporting documentation to ensure accuracy of the reported or billed allowable cost." FAR 42.202(e)(2) requires that: "The prime contractor is responsible for managing its subcontracts." This includes, but is not limited to, performing activities similar to that done by a Government contracting officer’s representative (i.e., the billings from the subcontractor are consistent with the scope work performed, an analysis of the allowability of the costs on the subcontract billing, subcontractor billing rates are updated timely to reflect year-end actual allowable rates, resolving any subcontractor overpayments timely). We examined SRC’s CORP-P-100, Approval and Signature Authority policy, dated June 22, 2021, and SRC CORP-D-100, Signature Authority Matrix Revisions with effective dates of January 20, 2022; March 1, 2023; and September 15, 2023, which state and include in part: “The procedure defines signature authority as identified in our Signature Authority Matrix. A sound internal control environment requires that only officers of the Company and their designees approve financial and contractual transactions for the company.” The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for no-subcontract invoices, approval by the program manager and review by the financial analyst is required. We additionally examined SRC's ACC-P-301, Subcontractor and IPO Accounts Payable Process, dated August 14, 2020, which includes a flowchart in line with CORP-D-100 requirements requiring approval by the program manager and financial analyst. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for IPO award forms, approval by the supervisor, program manager, financial analyst, contracts/subcontracts/purchasing manager, and materials program manager (if material) is required. We additionally examined SRC's SPP 10.1, Internal Purchase Orders, dated June 17, 2022, which state and include in part: "Once complete, the requestor shall route the IPO award eForm to the performing company's Contract Administrator...If determined to be correct and current, the Contracts Administrator shall route IPO award eForms containing Material to the Manufacturing Program Manager (MPM) group and service only IPOs directly to the Center Approver. For Material IPOs, the MPMs will review and confirm the information related to the Material and shipping, then route the eForm the Center Approver. The Center Approver shall review the eForm, approve, and route to the FA. The FA shall review and confirm the Accounting Information is correct, approve, and route to Subcontracts. " c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoices and the IPO award forms.
Finding 2023-003
2023-003 Internal Control and Compliance Finding Related to 48 CFR 9903.202-3 Amendments and Revisions a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed, Part B. Allowable Cost/Cost Principles noncompliance, Part H. Period of Performance, and 48 CFR 9903.202-3 Amendments and Revisions, identified an internal control deficiency regarding the written practices in the contractor’s DS pertaining to SCI costs. SRC has accounted for $16,886,093 of SCI costs that are not included in the G&A Base. The contractor's DS Revision 23, Effective October 1, 2022 (Page 29), states that SCI costs should be represented in any “corporate bases such as fringe and G&A.” We were able to trace specific SCI labor costs in the Fringe base but were unable to trace the total SCI costs to the G&A base. We learned from the auditee that the DS was misstated on April 24th, 2024, and that the costs should not be in the G&A base. The auditee conceded that the DS was incorrectly described. The costs are akin to G&A and to eliminate the administrative burden of coding the costs to an unallowable account to then be removed as part of the claim, they are simply excluded from the Incurred Cost Submission as the costs would not be included in the Value-Added Base. b. Criteria 48 CFR 9903.202-3 Amendments and revisions states the following compliance requirements: “Contractors and subcontractors are responsible for maintaining accurate Disclosure Statements and complying with disclosed practices. Amendments and revisions to Disclosure Statements may be submitted at any time and may be proposed by either the contractor or the Government. Resubmission of complete, updated, Disclosure Statements is discouraged except when extensive changes require it to assist the review process.” c. Recommendation The auditee should revise its DS to provide visibility and clarification as to the actual practices of SCI costs.