2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-001 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, Noncompliances a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 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 is claiming depreciation expenses in excess of what should be allocated to this FY. 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 percentage. 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 CFR 9904.404-40(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 Disclosure Statements regarding the self-constructed assets is not in compliance with its actual practice, which is noncompliance with 48 CFR 9904.404-40(a). The disclosure statement 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. Since the costs reviewed were for FY 2022 and the contractor has not had time to implement any corrective action, no additional testing was performed in our current audit. 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 Disclosure Statement, Revision 22, effective October 1, 2021 which states in part: Other: Residual Value Code ?Y? - New assets placed in service after July 01, 2004 and beginning depreciation October 1, 2004, will follow FAR 31.205-11 whereby residual value will only be used when the residual value exceeds 10% of the capitalized cost of the asset. Assets placed in service prior to July 1, 2004 and currently being depreciated as of October 1, 2004 will continue to be depreciated using an estimated 5% salvage value. 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. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-002 Internal Control and Compliance Finding Related to Proper Review and Approval of Internal Purchase Orders, Invoices, and Purchase Requisitions a. Condition Our review of compliance and internal controls testing in accordance with OMB 2022 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, non-subcontract invoices, and purchase requisitions. Inter-organizational transfer (IOT) costs are recorded to account number 5-4-080 ? IOT from LLC?s. We performed transaction testing for claimed IOT costs under auditable contracts. We judgmentally selected twenty-two IOT transactions amounting to $19,851,674 or 85 percent of the FY 2022 IOT auditable universe. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material 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). Eleven invoice approval eForms are applicable to one IPO. For five of the eleven invoice approval eForms, we noted the invoice was appropriately approved by the SRC program manager and financial analyst. For the other six invoice approvals 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 (related entity). 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 both IPOs, the IPO award eForms, for the base and all change orders, were approved by the related entity?s program manager instead of a SRC program manager. The SRC program manager is required to be involved in the monitoring, reviewing, and approving 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. During our examination of the selected direct material costs and period of performance testing, we requested and reviewed the purchase requisition (PR) eForms to ensure the auditee complied with internal controls related to PR approval. Three transactions that were incurred under contract FC003.07 had the PR approved by the related entity program manager, instead of the SRC program manager. The auditee stated the individual was given verbal delegation to approve on behalf of FC003 in the FY. SRC is allowing a program manager from a related entity to approve SRC purchase requisitions; which further supports that there is a clear lack of segregation of duties. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria: OMB 2022 Compliance Supplement, dated April 2022, 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 June 30, 2021; January 20, 2022; and June 30, 2022 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 non-subcontract invoice eForms, 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 eForms, 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 January 5, 2021 and 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. The Signatory Authority Matrix included in CORP-D-100 for Forms indicates that for PR eForms, approval by the program manager and financial analyst is required. We additionally examined SRC?s PUR-P-100, Purchase Requisition Process, dated May 15, 2020 and June 24, 2022, which states and includes in part: The Center Approver reviews the requisition, approves, and routes to the Financial Analyst (FA)... The FA reviews the requisition for completeness... validates the project, account, and organization numbers [then] reviews the REQ for approvals per the Signature Authority and approves Requisition and forwards to Purchasing. c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the IPO invoice approval eForms, the IPO award eForms, and the PR eForms related to direct material. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2022-003 Internal Control and Compliance Finding Related to Temporary Removal of Property a. Condition Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed, and Part B. Allowable Cost/Cost Principles, and Part H. Period of Performance, identified an internal control deficiency relating to temporary property removal. Direct Material costs are recorded to account number 5-3-000 ? Non-Inventory Direct Materials. We performed transaction testing for claimed direct material costs under auditable contracts. We tested thirty-two direct material transactions amounting to $872,022 or 47 percent of the FY 2022 direct material auditable universe. During the physical verification of materials, we identified materials that were shipped for contractor Demos and to other SRC locations. These transfers are subject to the policy and procedures set forth by the SRC MAT-P-540 procedure, which details how SRC employees are to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. As a result, we performed internal control testing to ensure the contractor is in compliance with its? policy. We identified two instances where no Temporary Property Removal eForm was created to initiate the transfer of products. There were also no eForms created for the return of materials. Although the product managers were aware of the transfer of materials, there were no formal documented approvals to transfer materials since eForms were not created. Also, there were no updates in the contractor?s asset management system tool (Sunflower). The potential loss of material instigated by the lack of monitoring could result in increased contract costs. Additionally, we had determined two causes of the internal control deficiency based on the auditee's rationale: (1) The employee responsible for one of the transfers was not aware of the requirements outlined in MAT-P-540 due to not being trained or informed of the procedures; and (2) the individuals responsible for the other transfer relied on verbal discussion as a form of approval, rather than actual formal documentation of approvals in accordance with MAT-P-540 that could be reviewed and evaluated. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, 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: Equipment, inventories, cash, and other assets that are physically secured, periodically accounted for, and reconciled to recorded amounts. Reports and communications including relevant, accurate, and complete information is provided to appropriate individuals on a timely basis. Ongoing or recurring practices that monitor activities or results are demonstrated and 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. We reviewed SRC's MAT-P-540, Temporary Property Removal, revision dated August 5, 2016, which states and includes in part: This document describes the process for a SRC employee to request permission to temporarily remove property from the facility; track property that has been removed; and track the return of property. In addition, section 2.0 Roles and Responsibilities of the procedure includes the following: c. Recommendation The auditee should comply with its formal policies and procedures regarding the temporary removal of property. They should ensure the proper eForms are being filled out and approved by the appropriate personnel, and the contractor?s asset management system tool (Sunflower) is being updated when materials are being temporarily transferred from one location to another. The auditee should ensure that all responsible employees are properly trained and made aware of the requirements of its policies and procedures regarding the temporary removal of property. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.